U.S. stocks end mostly off as bank worries persist

Nasdaq stays in the green ahead of Intel results

By

KateGibson

NEW YORK (MarketWatch) -- U.S. stocks on Tuesday ended mostly lower amid unease about the government's ability to rescue mortgage backers Fannie Mae and Freddie Mac, and as a sharp drop in crude prices bolstered some sectors, but hit energy companies.

"The Fed does not act like it has a plan to get us out of this. That's what markets did not like to hear," said Robert Brusca, chief economist at FAO Economics.

After an initial dive of more than 200 points, the Dow Jones Industrial Average
DJIA, +0.31%
toured positive territory as the price of crude fell, only to weaken again as the trading day neared an end, closing at 10,962.54, down 92.65 points, or 0.8%.

Of the blue-chip index's 30 components, 18 posted losses, led by American International Group Inc.
AIG, -0.18%
off 8.5% and Bank of America Corp.
BAC, +0.02%
off 8.1%.

Shares of General Motors Corp.
GM, +1.25%
gained 4.9% after the auto giant said it would cut salaries, worker benefits and its dividend as it grapples with the severe downturn in the U.S. car market. See full story.

Intel lifts Nasdaq

While the broad market dipped, the Nasdaq Composite
COMP, +0.47%
clinged to gains as traders bet on upbeat results from bellwether Intel Corp.
INTC, +0.45%
after the close. The tech-heavy Nasdaq finished on a gain of 2.84 points, or 0.1%, at 2,215.71.

Intel shares rose 1.2% to close 1.2%. After the close, the chip-maker reported a second-quarter net income of $1.6 billion, or 28 cents a share, compared with a profit of $1.28 billion, or 22 cents a share, for the year-earlier period.

Analysts had expected the Santa Clara, Calif. chip giant to report earnings of 26 cents a share on revenue of $9.3 billion, according to a consensus survey by FactSet Research.

The S&P 500
SPX, +0.31%
declined 13.39 points, or 1.1%, to end at 1,214.91, with energy off 3.9%, leading the losses hitting six of the index's 10 industry groups, followed by industrials, off 1.5%.

Gains on the S&P were fronted by the health care sector, up 0.9%.

Crude oil crumpled on thinking the economic downturn would reduce demand for fuel, with the contract for August delivery sliding $6.44 to $138.74 a barrel on the New York Mercantile Exchange. Read Futures Movers.

The dollar got some support from crude's decline, but remained under pressure after hitting a record low against the euro earlier on. See Currencies.

Also bolstering equities was word from the Securities and Exchange Commission that it would try to limit so-called naked shorting of shares in Fannie Mac
FNM, +7.06%
and Freddie Mac
FRE, +2.65%
along with primary dealers including Merrill Lynch Co. Inc.
MER, +1.71%
Morgan Stanley
MS, +0.26%
and Goldman Sachs Group Inc.
GS, -0.78%

Shares of already hammered Fannie Mae
FNM, +7.06%
dropped 27.3%, while those of Freddie Mac
FRE, +2.65%
declined 26%, as fears persisted about the impact of a U.S. plan to prop up the government-sponsored enterprises. See more.

Shares of First Horizon National Corp.
FHN, -0.36%
led a rally in banking stocks, with the latter up 16.9% after the Memphis-based bank posted quarterly results. See more.

Craig Hodges, co-portfolio manager of the Hodges Fund, offered a positive spin on the bear market. "This is about as bad for investor sentiment as I've ever seen, and that's typically a very good time to be investing," said Hodges. Listen to more.

Volume on the New York Stock Exchange topped 1.8 billion, and declining stocks outran those advancing 3 to 1. On the Nasdaq, more than 1.2 billion shares traded, and decliners shot down advancers 3 to 2.

Rate debate

Initially down for a third straight session, the major stock indexes had extended their losses and interest-rate futures traders briefly erased bets for a quarter-percentage-point interest-rate hike as soon as September as Bernanke began testifying before Congress.

But fed funds futures more recently showed a 26% chance of a quarter-percentage point rate increase as soon as September, down from a 52% likelihood on Monday.

If the Fed doesn't hike in September, futures indicate a 36% probability of a rate hike to 2.25% by November. The November contract recently had been priced for an increase of 50 basis points.

FOMC members' worry about inflation intensified in June, with most of the central bankers holding the view that inflation could climb more than expected in coming months, according to an economic outlook released by the Fed.

Next?

"The Fed stepped in and tried to bail out Fannie Mae and Freddie Mac, but talk continued to circulate that there would be nothing left. Add the FDIC takeover of IndyMac and the focus of the market shifted to who would be the next to fold," said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

Illustrating the fears roiling the financial sector, shares of Wachovia Corp.
WB, -0.70%
fell 7.7% following the bank's downgrade to underperform by Oppenheimer.

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